Beware of Unregulated Bitcoin Futures – Hong Kong

The Hong Kong’s securities regulator has recently published a new circular, which centres on unregulated bitcoin futures contracts and other investment products related to cryptocurrency.

The circular was published yesterday from the Hong Kong’s Securities and Futures Commission (SFC) and reminds providers of unregulated bitcoin futures contracts and other crypto-related investment products to be in compliance with legal and regulatory requirements. The circular was released about a week ahead of the day when Chicago-based CBOE began trading its futures contract after its launch on Sunday.

“Bitcoin Futures have been or will soon be launched by certain well-established futures and commodities exchanges in the United States which are regulated by the U.S. Commodity Futures Trading Commission and authorised by the Securities and Futures Commission (“SFC”) to provide automated trading services,” the Hong Kong regulator wrote.

Notably, the regulator added:

To prevent unregulated bitcoin futures contracts. Hong Kong investors will be made to trade in Bitcoin Futures through an intermediary which is a member of these exchanges.

In that sense, any body, party or intermediary who would provide services related to Bitcoin Futures are required to “have an appropriate license with the SFC…irrespective of whether the party is located in Hong Kong, so long as its business activities target the Hong Kong public.”

The Hong Kong’s securities regulator also made move to classify any operation which deals with bitcoin futures contracts as a “Type 2” regulated activity under the SFO (Securities and Futures Ordinance) laws. However, bitcoin futures contracts marketing will constitute a “Type 1” (dealing in securities) regulated activity and the management of any crypto-related investment product should be deemed a “Type 9” (asset management) regulated activity.

The Hong Kong’s securities regulator also place the spotlight on “some unregulated cryptocurrency exchanges” that are already offering cryptocurrency related investment products and futures contracts to the Hong Kong public. While it would be illegal for some unregulated bitcoin exchanges to offer these services without a license from the SFC, the regulator cautioned investors of other exchanges operating outside its jurisdiction.

The regulator went on to warn investors about risks involved, stating:

“The SFC reminds investors that trading cryptocurrencies may expose them to risks including insufficient liquidity, high price volatility and potential market manipulation… Investors may be exposed to substantial risks and significant financial losses in trading cryptocurrency futures contracts and other cryptocurrency-related investment products (e.g. options, swaps and contracts for differences), especially on unregulated exchanges.”

The regulator’s crypto-centric circular comes a week before the launch of bitcoin futures contracts offered by the CME Group, the world’s largest derivatives exchange.